Industrial Alliance Insurance & Financial Services Inc.’s decision to issue as much as $250-million in shares to pay down debt caught some on the Street by surprise given the improving earnings and macro environment.

IAG will issue 6 million shares at $37.50 for proceeds of $225-million, or 6.67 million shares for $250-million including the over-allotment.

The proceeds will bring the life and health insurance company’s leverage ratio down to 29.3% from 35.2%.

While the offering price represents a 3% discounts to Tuesday’s close of $38.59, Canaccord Genuity analyst Mario Mendonca thinks IAG is being opportunistic.

The company’s share price has risen 40% in the past three months and it recently reported the strongest quarterly results in many years.

Mr. Mendonca previously thought IAG would allow its leverage ratio to decline naturally over time through growth in common equity (earnings less dividends) and the maturity of debt.

“While it is entirely possible that external pressures from rating agencies or regulators caused management to act to reduce the leverage ratio aggressively, we believe the more likely explanation is that IAG management has never been comfortable with a high leverage ratio, and with the stock recently reaching multi-year highs, management could not resist the temptation to tap the market for common equity capital,” he said.

By going the debt-reduction route, the analyst noted that IAG will save $4.2-million per quarter in interest costs.

Factoring in both the interest savings and the stock issuance, Mr. Mendonca lowered his 2013 earnings per share forecast to $3.22 from $3.32 and his 2014 outlook to $3.64 from $3.76. That 3% reduction in his estimates is the same as the discount on the offering.

This prompted the analyst to trim his price target on IAG shares to $40 from $42 and lower his rating to hold from buy.

“The implied total return to our target price falls to 6% from yesterday’s close, well below the expected returns implied by our buy-rated banks and in line with the other insurers,” Mr. Mendonca told clients.

The analyst does not believe Manulife Financial Corp. and Sun Life Financial Inc. will follow in IAG’s footsteps.

While both insurers have high leverage ratios, he noted that Manulife’s share price remains well below the approximately $19 issue price of its last two equity offerings. The company’s reduced sensitivity to macro factors also suggests it can support a higher leverage ratio.

For Sun Life, Mr. Mendonca thinks an offering is unnecessary given its low sensitivity to markets and higher liquidity following the sale of its U.S. annuity business.

“What IAG’s equity offering does serve to highlight is the significant difference between banks and insurance companies insofar as capital is concerned,” the analyst said.

“We continue to view the insurers as being on defense while the banks have moved to offense,” he added, highlighting share buybacks at CIBC, expected dividend increases from five of the six big banks this quarter, and acquisitions by Royal Bank of Canada, Bank of Nova Scotia and Toronto-Dominion Bank.